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Trilemmas and Tradeoffs: Living with Financial Globalization

In: THE ASIAN MONETARY POLICY FORUM Insights for Central Banking

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  • Maurice Obstfeld

Abstract

This paper evaluates the capacity of emerging market economies (EMEs) to moderate the domestic impact of global financial and monetary forces through their own monetary policies. Those EMEs able to exploit a flexible exchange rate are far better positioned than those that devote monetary policy to fixing the rate — a reflection of the classical monetary policy trilemma. However, exchange rate changes alone do not insulate economies from foreign financial and monetary shocks. While potentially a potent source of economic benefits, financial globalization does have a downside for economic management. It worsens the tradeoffs monetary policy faces in navigating among multiple domestic objectives. This drawback of globalization raises the marginal value of additional tools of macroeconomic and financial policy. Unfortunately, the availability of such tools is constrained by a financial policy trilemma, distinct from the monetary trilemma. The second trilemma posits the incompatibility of national responsibility for financial policy, international financial integration, and financial stability.

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  • Maurice Obstfeld, 2021. "Trilemmas and Tradeoffs: Living with Financial Globalization," World Scientific Book Chapters, in: Steven J Davis & Edward S Robinson & Bernard Yeung (ed.), THE ASIAN MONETARY POLICY FORUM Insights for Central Banking, chapter 2, pages 16-84, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789811238628_0002
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